No-arbitrage option pricing models are used extensively in options markets and have been empirically tested extensively for equity options. No-arbitrage models have also been developed to price futures-options. One such model is Asay's modification of Black's European option pricing model. A futures-style margining system has been used for options traded on the Australian All Ordinaries Share Price Index Futures Contract on the Sydney Futures Exchange since May 1985 and Asay's model is used by the Sydney Futures Exchange for setting volatility estimates and margin requirements.
In this report Asay's model is tested for pricing performance and exercise mispricing bias. In terms of time frame and sheer size, an extensive data set is used for this study and in fact the data set used in this study is larger than those previously used in published empirical research relating to both futures and equity options. Data used in this study consisted of all day time trades which occurred in both the SPI futures and call options markets for the period January 4 1993 to July 29 1994.
A major problem encountered in previous research, which is not often acknowledged by researchers, is the problem of non-synchronous trading due to use of closing prices. Two volatility measures are used in this paper to generate theoretical option prices. Significantly, the pricing performance of the option model is better when an implied volatility measure from the most recent trade is input into the model suggesting that using closing prices or volatility estimates calculated from a previous day's data is invalid. Results indicate that an exercise price bias does exist in the Australian All Ordinaries SPI futures call options market and that this bias is independent of the method used to estimate volatility. Asay's model is found to underprice in-the-money options and overprice out-of-the-money options.